US Economy Is Steadier Than It Used To Be
BOSTON — America's economy has become boring. It is less volatile, has fewer ups and downs. No recession on the horizon.
Unemployment for months has been running about 5.3 percent. Inflation hovers at about 3 percent. Gross domestic product (GDP), in real terms, grew 2 percent in 1995, 2.3 percent last year, and economists expect roughly the same increase in the national output of goods and services this year.
"We have got boring [government economic] policy, which is giving us a stable economy," says Roger Brinner, chief economist at DRI/McGraw-Hill in Lexington, Mass. That contrasts with "a history of activist fiscal and monetary policy."
There have been no recent "grand experiments" in budget policies, such as the huge tax cut and military buildup in the early Reagan presidential years, or the surge in Vietnam war spending in the late 1960s. Monetary policy has been relatively steady under Federal Reserve chairman Alan Greenspan, not jumping from "highly stimulative," as it was when G. William Miller was Fed chairman in the late 1970s, to "real tough," as when Paul Volcker took over in 1979.
Nor have there been any major outside "shocks" to the economy, such as the quadrupling of oil prices by the OPEC cartel in 1973-74. "We haven't had any of that since the victory over Iraq in 1991," Dr. Brinner says.
So for six years, there have been neither dramatic policy changes nor major economic shocks. "With the wavemakers gone, it is no wonder the waves have died down," he says.
Gary Bigg, an economist at Prudential Economics in Newark, N.J., says even the stock market is less volatile. Between 1947 and 1988, he notes, the monthly change (standard deviation) in prices for the Standard & Poor's 500 stock index was 3.3 percent. Since 1988, it has been 2.5 percent.
Like Brinner, Mr. Bigg sees a "consistent" Fed monetary policy helping to stabilize interest rates and inflation.
One result has been that business for interest-rate-sensitive industries - residential spending, equipment investment, and consumer durables (refrigerators, automobiles) - has varied less.
Further, Bigg notes, GDP is less volatile. Over the period from 1961 to 1984, there were 37 quarters (38.5 percent of the total) where real GDP growth either exceeded 5 percent or declined by more than 5 percent. Over the years from 1985 to the present, there were only four (or 8.3 percent) such quarters.
H. Woody Brock, president of Strategic Economic Decisions in Menlo Park, Calif., offers another reason for this increase in stability: Industries are less correlated. When business goes down in one industry, it is less likely to drag down business in another industry. Or if business picks up in one industry, it is more likely to be balanced by a drop in business elsewhere.
"This is self-stabilization of the economy," says Mr. Brock.
If measured by changes in quarterly GDP, Brock says, that volatility, has fallen some 60 percent since 1945 and 70 percent since 1900.
What still causes output to fluctuate is the bond market, says Brinner. "Almost all the variations in the national economy over the past four years can be traced to the rise and fall of long-term interest rates," note Brinner and colleague Davis Wyss in a monthly report. "With a lag [time] of almost precisely four quarters, each percentage-point increase in the bond rate has cut real GDP growth by one percentage point; each percentage-point decline has similarly raised GDP growth."
Changes in interest rates affect the output of rate-sensitive industries, and thence the economy as a whole.
But Brinner suggests that bond market participants act "chiefly on an emotional basis," rather than on logic. Monthly changes in prices or industrial output have no real significance to 10- or 30-year securities, he says.
Given interest-rate trends for bonds a year ago, Brinner expects slower growth this year - about 2 percent in real terms.